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For buy to let, 2017 could be 2009 all over again – Octopus Property

by: Mario Berti, chief executive, Octopus Property
  • 13/12/2016
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For buy to let, 2017 could be 2009 all over again – Octopus Property
It's been a brutal year for buy-to-let. A raft of changes either live or coming soon, ranging from the Stamp Duty surcharge and restrictions on mortgage interest tax relief to much more stringent underwriting standards, have hit landlords hard.

Landlords, however, are nothing if they’re not resilient. This resilience has already started to show through with the announcement, by Kent Reliance, that the number of landlords borrowing through company structures hit 100,000 in the first nine months of 2016 alone — twice the amount of company loans in 2015 as a whole.

Adapt to survive

Other landlords, it’s been reported, have started to transfer properties into the names of close family members who are basic rate taxpayers. Others still are simply upping rents, which many observers warned was always likely to happen. Rents could go higher still now that letting agents’ fees have been scrapped.

Either way, there is no shortage of evidence of how landlords are adapting to the brave new world they’re in.

For us, demand from landlords has remained strong throughout the course of 2016, particularly among more established portfolio landlords. After all, so entrenched is the housing shortage and so out-of-reach the average house price that while buy to let is being squeezed both fiscally and politically, there is little doubt the sector has a future.

It’s not just the affordability crisis that is affecting the sector; we are also seeing a general cultural shift away from the need to own property. Hard Brexit or soft, few would deny that we are switching to a more European mind-set, and this, too, will ensure the buy-to-let sector continues to have a role to play.

What tempering in demand there has been has largely come from amateur landlords for whom buy to let is more an income generator on the side than a business. Understandably, given the raft of changes, many have decided that now is the time to head for the door.

While we expect demand from portfolio investors and serious buy-to-let landlords to remain strong in 2017, the enhanced level of stress and affordability testing that will be carried out under new buy-to-let regulator, the Prudential Regulation Authority, could change the make-up of the sector.

Stressed out

The regulation will become so rigorous that we could a witness a retreat by mainstream buy-to-let lenders similar to the one we saw in 2009. Those lenders that do remain will have strict underwriting policies that many borrowers simply will not be able to meet — especially portfolio landlords with four or more properties or non-standard borrowers who will often be an immediate red flag.

As a result, and just as in 2009, we could see another lending gap emerge, and once again we believe this gap will be filled by specialist lenders who are flexible, agile and skilled enough to look at non-standard cases — ranging from first-time landlords and minor adverse to HMOs and foreign nationals — on their own merit. This is the climate Octopus Property launched into back in 2009 and it’s one we are yet again ready to embrace.

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